Page 292 - DMGT407Corporate and Business Laws

Unit 12: Management of Companies

Appointment by third parties. Under s.255, there cannot be more than one-third of the total Notes
number of directors, which are not subjected to retirement by rotation. The third parties
may be empowered by the Articles to nominate directors. Such third parties may be
lenders of money - i.e., financial institutions, debenture holders.
5. Number of Directorships. A person cannot hold office at the same time as a director in
more than twenty companies (s.275). In computing this number of 20 directorships, the
directorships of (i) private companies (other than subsidiaries) (ii) unlimited companies
(iii) non-profit association and (iv) alternated directorships will be omitted (s.278).
If a person, who is already a director of 20 companies, is appointed a director in any other
company, the appointment will not be effective unless within 15 days thereafter, the
director so has vacated his office in any of the companies in which he was already a
director as to keep the number within the maximum allowed. None of the new
appointments of director shall take effect until such choice is made and all the new
appointments will become void if the choice is not made within 15 days of the day on
which the least of them were made (s.277). Any person who holds office of, or acts as a
director of more than 20 companies in contravention of the foregoing provisions is liable
to be fined up to ` 5,000 in respect of each of those companies after the first 20 companies
(s.279).

Example: If a person is already a director of 20 public companies and if a private company
of which he is a director has become a public company under s.43-A, then, he will have to give
up the directorships of one of those companies.
6. Qualifications and Disqualifications of Directors. The Act has not prescribed any academic
or professional qualifications for the directors. Also, the Act imposes no share qualification
on the directors. So, unless the company’s Articles contain a provision to that effect, a
director need not be a shareholder unless he wishes to be one voluntarily. But the Articles
usually provide for a minimum share qualification. Where a share qualification is fixed
by the Articles of a company, the Act provides (s.270) that: (i) it must be disclosed in the
prospectus; (ii) each director must take his qualification shares within two months after
his appointment; (iii) the notional value of the qualification shares must not exceed ` 5,000
or the nominal value of the one share where it exceeds ` 5,000; (iv) share warrants will not
count for purposes of share qualification.

If a director fails to obtain his share qualification within two months, he vacates office
automatically on the expiry of two months from the date of his appointment and if he acts
as director after the expiry of two months without taking the qualification shares, he is
liable to a fine up to ` 50 for every day until he stops acting as such (s.272).
However, the articles of a company cannot compel a person to hold qualification shares
before he is elected a director nor can they require him to obtain qualification shares
within a shorter period than two months after his appointment and if any provisions to
this effect is made in the Articles, it shall be void.
The effect of this provision is that, if the company is wound up during this period of two
months, the director cannot be placed in the list of contributories, in as much as there is no
express or implied contract under which he would be bound to take the qualification
shares, since his name cannot be put on the register of members unless he has applied for
shares and these are allotted to him.
However, a private company which is not a subsidiary of a public company may, by its
Articles, provide additional qualifications for a director, such as, a person must be a B.
Com. or holding a fixed deposit receipt in his own name issued by the company.

LOVELY PROFESSIONAL UNIVERSITY 285